Mexican President Enrique Peña Nieto has now placed his signature on the secondary legislation necessary to codify last year’s constitutional amendments that opened the energy sector to private investment. With the ink barely dry, the focus must now turn to the crucial implementation period when the institutional and market architecture must go from blueprint to the hard work of construction.
The December 2013 constitutional reform ended the monopoly of the state-owned energy company Pemex and introduced private investment into every segment of Mexico’s hydrocarbon sector. It also gave regulatory authority to a new set of autonomous, independently funded entities that will oversee licensing, safety and environmental protection. Additionally, the reform required Pemex be transformed into a “state productive enterprise” and established the Mexican Petroleum Fund under the purview of the Central Bank to manage contract payments and oil revenue.
There are uncertainties about how Mexico’s new energy model will function when fully implemented, but they appear to be within the norms of other energy sector openings and entirely normal for this type of major reform. Mexico derived a bonus from the timing of its overhaul in the form of “lessons learned” and “best practices.”
The secondary legislation enables the constitutional reform and serves as the basis upon which business and investment decisions will be made. The package of bills included some 21 legislative changes that detail the fiscal regime, including the contract terms for private-sector upstream participation, as well as the responsibilities of the regulatory entities and new transparency and anti-corruption measures that will govern the sector.
Though the legislation that has now passed after several marathon sessions does not erase every doubt and eliminate every uncertainty, reaction has been favorable. Energy analysts have termed the legislation “fairly pro-market” and worries articulated early on in the process — notably about whether private parties would be able to book oil reserves or the expected revenue streams from them for financial reporting purposes — have been satisfactorily addressed.
Observers have been nearly unanimous in commending the government for its thorough preparation and commitment to following best international practices. They also have made note of the strong pro-market attitude and stance of government officials and a demonstrable commitment to the investor community.
One aspect of the secondary legislation of particular interest internationally is the provision relating to national content requirements. The legislation specifies a 25-percent national content minimum for incoming companies by 2015, which will increase to 35 percent by 2025. Analysts note the requirements are very competitive with those specified by other countries and have commented they are a “non issue.”
Energy companies and investors appreciate what it takes to build a vibrant energy sector and know it requires much more than legislation. The legislation and the infrastructure that allow it to function are fundamental, and Mexico has done well in meeting expectations in these areas thus far. But each stage of the transition is important, and as the proximate period entails a central role for Pemex, both as the primary domestic operator and as a potential transitional partner, some are voicing concerns. Quashing these doubts is a tall order for the company, which is not known as nimble or efficient and which must overcome perceptions of corruption, demonstrate its commitment to transparency and rapidly move to a new rule-driven, competitive reality.
The energy opening has been termed “Mexico’s second revolution.” And, while some may view the statement as an exaggeration, few would dispute the reform will be transformational for the country. Given Mexico’s immense existing and potential resource wealth, and its other favorable attributes, the energy reform should attract international interest appropriate to the unique and unusual opportunity it presents. For those involved in a booming energy sector, the extension of North America’s energy renaissance is a good thing.
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